The Communist Party of China Targets Wealth Rankings for Tax Collection: How Mainland China's Super Rich Are Responding

Illustration: China's economy continues to decline. (Photo by China Photos/Getty Images)

[People News] In recent years, local governments in China have been under increasing fiscal pressure due to persistently weak domestic demand and broader economic imbalances. The Central Committee of the Communist Party has been promoting the 'common prosperity' policy, and the implementation of the global automatic exchange of tax information on financial accounts (CRS) has resulted in unprecedented levels of tax audits and enforcement aimed at high-net-worth individuals (the super-rich). Wealth advisors, lawyers, and other informed sources indicate that as the deadline for declaring overseas income approaches, some of China's wealthiest individuals are gradually withdrawing from offshore trusts, selling stocks, and even relinquishing their residency rights in mainland China.

Official data from the Communist Party of China indicates that last year, central and local governments spent $1.9 trillion more than they earned. With the real estate market continuing to decline and local governments losing this crucial revenue source from land sales, they are eager to explore new funding avenues and have redirected their focus back to the wealthy.

According to Reuters, three informed sources have disclosed that the State Administration of Taxation of the Communist Party of China has instructed staff to compile a list based on the Hurun Rich List, corporate documents, and other public information to identify individuals liable for offshore trust taxes. In regions where wealthy individuals are concentrated, tax authorities have set up specialised working groups tasked with gathering information on offshore trusts.

Several foreign media outlets have reported that the State Taxation Administration of the Communist Party of China is currently utilising public information, including the Hurun Rich List, announcements from listed companies, and overseas prospectuses (IPO prospectuses), to accurately identify and cross-reference the assets and overseas income of wealthy individuals. This has led to the implementation of comprehensive tax collection and supplementary tax measures targeting offshore trusts.

Has the 'Hurun List' shifted from being an honour roll to a 'pig-killing list'?

Previously, wealthy individuals vied for a spot on the list to demonstrate their corporate strength, secure financing opportunities, or enhance their political status. However, the Hurun List, in assessing wealth, provides detailed information on the equity stakes held by the wealthy, the entities they are listed under, and their personal asset structures. Now, this publicly available data is being used by tax authorities as a 'precise tax audit list,' allowing for accurate cross-referencing with individual income tax declaration records.

In the past, many founders of listed companies (such as major shareholders of Meituan, Pinduoduo, Longfor, etc.) would place their shares into offshore trusts established in the Cayman Islands or BVI, believing this would help isolate risks and legally avoid taxes. However, following the introduction of new tax regulations on offshore trusts, their income is now subject to scrutiny, with personal income tax rates reaching as high as 20%. The 'safe haven' that offshore trusts once provided has become ineffective.

In addition to public lists, authorities have also integrated tax-related information from financial accounts with automatic exchange systems (CRS) and bank fund monitoring, which has rendered the protective benefits of offshore trusts nearly completely ineffective.

The current collective panic and response actions of the wealthy

In light of the impending tax collection deadline and stringent regulatory pressures, Chinese billionaires and the asset management sector are undergoing an unprecedented 'capital defence war.'

To avoid being classified as engaging in 'false disposal' or facing substantial back taxes, some wealthy individuals have opted to dissolve their offshore trusts ahead of the deadline.

In their efforts to raise tens of millions or even hundreds of millions to cover back taxes and fines, some wealthy individuals have been compelled to liquidate shares of overseas-listed companies to generate cash.

Many affluent individuals are trying to completely change their nationality or relocate abroad before the compliance deadline, seeking to legally escape China's tax jurisdiction.

Local Financial Struggles and the 'Harvesting Leeks' Logic

This wave of targeted tax collection reflects the deep economic challenges currently facing China:

With the breakdown of land finance and the collapse of the real estate market, local finances are under severe strain, prompting local governments to urgently seek new revenue sources. 'Taxing the wealthy' has emerged as the method with the lowest cost and the highest yield.

In recent years, offshore trusts have gained popularity as a means for Chinese individuals to transfer wealth overseas, especially among major shareholders of Chinese companies listed abroad. The Boston Consulting Group estimates that China's offshore wealth amounts to approximately $17 trillion. Now, under the tightening of policies by the Chinese Communist Party (CCP) and the framework of 'common prosperity,' all of this wealth has become a target for the authorities' precise actions.

This situation also validates a saying that has gained traction in China's business circles in recent years: 'The rich list is akin to a pig slaughtering list; once you appear on the Hurun list, prison or bankruptcy is not far off.'

According to a report by Radio Free Asia in December 2015, from 1999 to 2015, the Hurun China Rich List identified a total of 35 'problematic tycoons' over a span of 17 years. Among these, 18 tycoons were imprisoned, 5 are awaiting sentencing, and 1 has been executed. Analysts suggest that the high proportion of problematic tycoons in China is closely linked to the unique circumstances of the Chinese Communist Party's collusion between officials and businessmen, which has heightened the political risks associated with entrepreneurship.

Tax liabilities reaching billions of yuan

The Chinese Communist Party has established October 22 as the deadline for declaring offshore trust income, imposing a 20% tax on such earnings.

On October 16, Reuters reported that Oscar Liu, CEO of the wealth consulting firm JLT Legacy Group, noted that founders of Chinese companies listed in Hong Kong and the United States are the most impacted by the new tax policies. Many of these founders sold shares through trusts during the peak valuation period of their companies from 2014 to 2020.

Oscar Liu remarked, 'We estimate that the tax liabilities for individual cases could range from several million yuan to hundreds of millions of yuan, or even billions of yuan.' Liu's company operates offices in both Hong Kong and Singapore.

Fundraising and relinquishing mainland residency

According to a report by The Epoch Times citing Reuters, a family office lawyer stated that clients cannot offset tax liabilities with declining stock prices. Real estate developers who received substantial dividends in recent years are now facing financial difficulties due to the sluggish real estate market and are unable to meet their tax obligations.

A family office belonging to a technology billionaire has reported that they now dedicate more time to tax calculations than to transactions, leading them to sell off about half of their stock investment portfolio.

"It's like having the rug pulled out from under you," remarked an employee at the office, referring to the requirement to pay taxes in cash within three months.

A private banker at a major international bank noted that banks are currently offering loans to private clients to cover their tax payments, with these loans secured against the clients' own company shares. This banker specializes in serving high-net-worth individuals and family offices.

To meet their tax obligations, some Chinese billionaires have started using overseas assets as collateral to obtain loans from banks, which has become a significant source of revenue growth for major banks like Goldman Sachs and JPMorgan.

The offshore trust tax system implemented by the Chinese Communist Party has also compelled some wealthy individuals to restructure their corporate and family wealth holding structures. A trust lawyer in Hong Kong mentioned that some individuals have even closed newly established trusts before making any capital contributions.

A mainland individual with Hong Kong residency, who currently works as an insurance agent in Hong Kong, shared that she has relinquished her mainland residency rights to protect her husband's wealth from Beijing's regulations, despite the fact that her husband is not a mainland tax resident.

Liu Xie indicated that due to offshore trust holders calculating their tax liabilities, few are inclined to pursue new investments.

Lack of Clarity in CCP Policies

Even among those Chinese billionaires who have started looking for tax payment solutions, there is confusion regarding certain ambiguous aspects of the new regulations, such as the scope of taxation, retroactive applicability, and the tax payment process.

The regulatory scope is quite extensive," stated Wei Kang, a partner at Charles Russell Speechlys. She offers consulting services on complex trust and estate structures, taxation, and compliance for high-net-worth individuals and families.

Wei Kang further explained that the new tax law implemented in July connects tax obligations to whether a taxpayer's "primary economic interests" are linked to China. This is a concept that can easily lead to ambiguity and cannot be determined solely based on actual residence or nationality.

She also mentioned that it remains unclear whether the tax is effective from the moment the trust is established or only within a specific timeframe.

Christine Wong, a senior research fellow at the East Asian Institute of the National University of Singapore, told Bloomberg that historically, the tax authorities of the Chinese Communist Party focused mainly on achieving tax revenue targets and were less concerned about the enforcement of tax laws. However, the situation has changed; the Chinese Communist Party is genuinely facing a financial shortfall now.△